Charles Koch

"What should they name the new company? Charles and Sterling had successfully fused the many companies Fred Koch ran into one firm, but now they needed to name it. Why not call the company Koch Industries? The name would honor Charles’s late father, and it was an easy enough catchall title for a group of businesses that were already very diverse. Charles Koch wasn’t wild about the idea. He seemed embarrassed by the thought of having his last name stamped on the entire company. His name would be embossed on the letterhead, emblazoned on the sign outside the company headquarters, spoken on the lips of everyone who worked for him. There was a vanity about this that seemed at odds with Charles Koch’s nature. But Williams argued in favor of naming the company Koch. In his mind, the benefit of the name was that it was neutral, in the way Exxon was neutral. For many industries, neutrality was the enemy. Companies like Coca-Cola spent millions to ensure that their names weren’t neutral and forgettable. But the oil industry was different because Big Oil was cast as the villain in so many economic stories. For this reason, “Koch” was the perfect moniker for the firm. It was slippery, hard to grasp. Everybody mispronounced it when they read the name, and when they heard the name, they confused it with the much better known soft-drink maker. Koch was the perfect flag to fly for a firm that sought to grow, and grow exponentially, while simultaneously remaining invisible."

"the numbers that the company focused upon were telling. Charles Koch didn’t care much about sales or costs—he cared about profits. He wanted to know how profitable any line of business was and how profitable it could be under the right management. He steered all of his managers to think this way. The key thing they needed to focus on was the return on investment, or ROI—what was the best use of Koch Industries’ money?"

"In the early 1980s, after he was unfettered from his dissident brothers, Charles Koch began to reveal just what his management dreams would look like. There was an auditorium at Koch Industries headquarters, and Charles Koch began to hold events there, filling the seats with between four hundred and five hundred of his most senior managers. Lynn Markel, Brad Hall, Bernard Paulson, and others would file into the room and take their seats. The events were not the typical corporate presentation; Charles didn’t use the forum to talk about business operations or to hold some kind of pep rally. Instead, Charles Koch often sat in the audience himself, taking notes. The executives sitting near Charles Koch saw that this wasn’t a business meeting—class was in session. In fact, they were attending the first seminars in a decades-long curriculum that would become the central work of Charles Koch’s life."

"Soon each division was writing a profit goal for the quarter, rather than a budget. Sales, costs, and prices could veer wildly, but what mattered was whether a division hit its profit goal for the year. And Charles Koch was thinking in terms of years, not quarters. This was critical for a company in a highly volatile business. A graph showing Koch’s sales and costs and the price of oil might spike and dip violently from week to week. But Charles Koch was only interested in whether the return on investment climbed steadily over the years. “You didn’t know what the exact trajectory was going to be. But you knew it was up, and to the right,” Markel recalled."

"Bill Koch was made vice president of a new division called Koch Carbon, which was typical of the kinds of businesses that Charles Koch and Sterling Varner liked to pursue: it pushed the company into new territory and new markets by building on what Koch already knew. Koch Carbon was branching out into the coal mining and processing industries, which built on Koch’s knowledge of the fossil fuel business."

"Charles Koch and Sterling Varner held quarterly meetings to evaluate how managers like Williams were doing in this regard. Williams was expected to report on his pipeline business and also to bring up new “high-quality investments” that he had spotted in the field. A ritual was formed at these meetings. A manager like Williams would propose the idea for some new investment. And then the questions would begin. Charles Koch’s questions were relentless, seemingly never ending, and the managers understood that they must be prepared to answer all of them. If a manager didn’t have the answers, the topic was dropped until he could return with them."

"These teachings—the “classic Sterling” guidelines—were some of the key elements of Charles Koch’s new philosophy. Opportunism was one: every employee needed to keep their eyes open for new deals on the horizon. Humility was another: “knowing what you know and what you don’t know,” as Brad Hall recalls it. Humility dictated that while it was important for Koch to expand, the company needed to expand into fields where it already had expertise. Strength would be built upon strength."

"employees felt like they owned a piece of Koch Industries. Charles Koch gave them performance-based bonuses and issued them “shadow stock” contracts that paid out as the company’s value increased, but that didn’t confer actual ownership. The real shares of Koch Industires were tighly held by Charles and David Koch,"

"Every Koch business leader was expected to create their own Value Creation Strategy. They needed to look for new companies to buy, new plants to build, and expansion projects for existing plants. This wasn’t exactly new—growth was ingrained in Koch’s DNA from the beginning, when Sterling Varner encouraged his employees to keep their eyes peeled for investment opportunities. But the VCS regimen was different. Business leaders knew that Charles Koch would cut or increase their bonus pay based on the Value Creation Strategies they delivered. Expansion was once applauded; now it would be required."

"The development group that Brad Hall oversaw resembled these private equity firms in some ways. But there was a fundamental difference. Koch’s development group had patience. It thought on a timeline of ten or twenty years, not twelve to eighteen months. And, unlike virtually any other private equity firm, Koch’s group had only two shareholders to answer to: Charles and David Koch. For these reasons, Koch made acquisitions like nobody else. It tended to rush into markets when others were leaving. It tended to buy companies only when they were distressed and no one else wanted them. Koch was accustomed to the wild volatility of energy markets, so the company knew that most downturns were temporary."

"debt. This was not a particularly hard case to prove. Dean Watson, for example, had been Purina’s CEO. But had he ever truly been independent from Koch Industries? When Watson was in trouble, he called Wichita. Purina’s payroll was processed in Wichita, along with other administrative functions. One of Purina’s most vital business activities—buying the grain to make its feed—had been shifted to Koch Industries’ trading floor. It was impossible to make the argument that Koch was not fundamentally involved in Purina’s daily operations. The banks would sue Koch in order to pierce the veil, and going to court was a risky proposition for Koch Industries. Piercing the veil was a “binary” proposition: either the bankers pierced the veil, or they did not. With a single verdict, a bankruptcy judge could expose Koch to enormous liabilities. If Koch lost the court battle, it could also affect the entire system that Charles Koch built over thirty years. By the late 1990s, the company was an impossibly dense interlocking set of supposedly independent subsidiaries and joint ventures. This arrangement allowed Koch to become enormous by swallowing up dozens of smaller companies while shielding it from the full liability of owning each of those companies."

"The training began with a stringent hiring process that selected only a certain kind of employee. Koch Industries developed a four-part interview process that revolved around Charles Koch’s Ten Guiding Principles. Job candidates, many of them fresh out of college, were led through lengthy lists of questions that sought to determine if they would adhere to Koch’s principles. Only the select few were chosen. “You need diversity in certain ways,” explained Randy Pohlman, who directed Koch’s human resources division until the mid-1990s. “But if you’re Koch Industries, you don’t want people who don’t believe in free markets. They’re not going to be successful there. That’s not the kind of diversity you want. . . . If you’re going to start hiring every other person as a Socialist to have nice diversity—it’s not going to work,” Pohlman said. Once the free-market adherents were hired, Koch began training them immediately. The new hires were collected in groups and led down a long hallway in the basement of the Tower, to a large conference room where round tables were set up to accommodate them. Their training session began with a video address from Charles Koch, projected on a large screen. He laid out the central tenants of MBM, and emphasized the importance of learning the code. And after the video was finished, employees learned the specific codes and rules of this new way of thinking. They broke into small groups and ran through simulations where they put the principles into practice. The training sessions lasted roughly two days. Once employees were on the job, the culture and the vocabulary were reinforced daily in every meeting and conversation, to create a kind of deep muscle memory of the culture."

"Charles Koch took the stage, and his mood was somber. As he stood in front of the crowd, he described the severity of the economic downturn. He didn’t try to varnish the ugly truth or avoid stating directly what many of them knew was coming. Charles Koch walked through each division of the company and explained the damage that was being done. There was less demand for construction materials at Georgia-Pacific. There was less demand for carpeting and clothing at Invista. There was less demand for fertilizer, less demand for gasoline from the refineries. Not everyone at the company would come back from the holidays to a job. “He was standing up there in front of probably two thousand people, saying, ‘Look, we’re obviously going to get through this. But I’m going to be very honest with you folks. We’re going to have to make some very serious adjustments to get through it,” Jones recalled."

"Charles Koch and his lieutenants considered Koch to be an information-gathering machine that built up stores of knowledge that were deeper and sharper than its competitors’."

"Koch’s growth was not slow and steady—it was seismic, with periods of steady advancement that were punctuated by great lurches forward. Charles Koch had claimed to crack the code of creating prosperity, and the wealth machine he built now seemed unstoppable."

"When each employee is hired, he or she undergoes a multiday training session to learn the tenets of Charles Koch’s philosophy, Market-Based Management, or MBM as they call it. Charles Koch says the philosophy is a blueprint for achieving prosperity and freedom. It is equally applicable to business ventures, personal habits, and national government. Adherence to the creed is nonnegotiable for anyone who remains at Koch Industries. Charles Koch, in one of his books, writes that an “act of conversion” is necessary for MBM to be effective. It cannot be adopted in bits and pieces. The Ten Guiding Principles of MBM are printed and hung above cubicles throughout company headquarters. When employees get free coffee in the break room, the Guiding Principles are printed on their disposable cups. The employees learn MBM’s vocabulary and speak a language among themselves that only they truly understand. They drop phrases like “mental models,” “experimental discovery,” and “decision rights,” that instantly convey deep meaning to insiders. The employees become more than employees; they become citizens of an institution with its own vocabulary, its own incentives, and its own goals in the world."

"What should they name the new company? Charles and Sterling had successfully fused the many companies Fred Koch ran into one firm, but now they needed to name it. Why not call the company Koch Industries? The name would honor Charles’s late father, and it was an easy enough catchall title for a group of businesses that were already very diverse. Charles Koch wasn’t wild about the idea. He seemed embarrassed by the thought of having his last name stamped on the entire company. His name would be embossed on the letterhead, emblazoned on the sign outside the company headquarters, spoken on the lips of everyone who worked for him. There was a vanity about this that seemed at odds with Charles Koch’s nature. But Williams argued in favor of naming the company Koch. In his mind, the benefit of the name was that it was neutral, in the way Exxon was neutral. For many industries, neutrality was the enemy. Companies like Coca-Cola spent millions to ensure that their names weren’t neutral and forgettable. But the oil industry was different because Big Oil was cast as the villain in so many economic stories. For this reason, “Koch” was the perfect moniker for the firm. It was slippery, hard to grasp. Everybody mispronounced it when they read the name, and when they heard the name, they confused it with the much better known soft-drink maker. Koch was the perfect flag to fly for a firm that sought to grow, and grow exponentially, while simultaneously remaining invisible."

"These teachings—the “classic Sterling” guidelines—were some of the key elements of Charles Koch’s new philosophy. Opportunism was one: every employee needed to keep their eyes open for new deals on the horizon. Humility was another: “knowing what you know and what you don’t know,” as Brad Hall recalls it. Humility dictated that while it was important for Koch to expand, the company needed to expand into fields where it already had expertise. Strength would be built upon strength."

"David and Charles Koch did not invent a major new product or revolutionize any industry. The Koch brothers derived their wealth through a patient, long-term strategy of seizing opportunities in complex and often opaque corners of the economic system."

"When Charles Koch entered the room, it became clear almost instantly that this man was the master of this domain. The people around him treated Charles Koch with deference—a deference that seemed to go deeper than simple respect for a boss. Sollers and Ballen had no way of knowing that Charles was not, in fact, just the boss of the company. He was its leader. Charles Koch did not order people around him to do what he said. He inspired them to do so. He had a command of the people around him that was difficult for outsiders to understand. Visitors like Ballen and Sollers couldn’t have known that Charles Koch had spent decades building up the loyalty and admiration of the people who worked for him. They didn’t know about his management seminars, the classes and lectures that he held to impart his philosophy."

"the numbers that the company focused upon were telling. Charles Koch didn’t care much about sales or costs—he cared about profits. He wanted to know how profitable any line of business was and how profitable it could be under the right management. He steered all of his managers to think this way. The key thing they needed to focus on was the return on investment, or ROI—what was the best use of Koch Industries’ money?"

"Charles Koch and Sterling Varner held quarterly meetings to evaluate how managers like Williams were doing in this regard. Williams was expected to report on his pipeline business and also to bring up new “high-quality investments” that he had spotted in the field. A ritual was formed at these meetings. A manager like Williams would propose the idea for some new investment. And then the questions would begin. Charles Koch’s questions were relentless, seemingly never ending, and the managers understood that they must be prepared to answer all of them. If a manager didn’t have the answers, the topic was dropped until he could return with them."

"Soon each division was writing a profit goal for the quarter, rather than a budget. Sales, costs, and prices could veer wildly, but what mattered was whether a division hit its profit goal for the year. And Charles Koch was thinking in terms of years, not quarters. This was critical for a company in a highly volatile business. A graph showing Koch’s sales and costs and the price of oil might spike and dip violently from week to week. But Charles Koch was only interested in whether the return on investment climbed steadily over the years. “You didn’t know what the exact trajectory was going to be. But you knew it was up, and to the right,” Markel recalled."

"Bill Koch was made vice president of a new division called Koch Carbon, which was typical of the kinds of businesses that Charles Koch and Sterling Varner liked to pursue: it pushed the company into new territory and new markets by building on what Koch already knew. Koch Carbon was branching out into the coal mining and processing industries, which built on Koch’s knowledge of the fossil fuel business."

"In the early 1980s, after he was unfettered from his dissident brothers, Charles Koch began to reveal just what his management dreams would look like. There was an auditorium at Koch Industries headquarters, and Charles Koch began to hold events there, filling the seats with between four hundred and five hundred of his most senior managers. Lynn Markel, Brad Hall, Bernard Paulson, and others would file into the room and take their seats. The events were not the typical corporate presentation; Charles didn’t use the forum to talk about business operations or to hold some kind of pep rally. Instead, Charles Koch often sat in the audience himself, taking notes. The executives sitting near Charles Koch saw that this wasn’t a business meeting—class was in session. In fact, they were attending the first seminars in a decades-long curriculum that would become the central work of Charles Koch’s life."

"The business failures of the 1990s impressed on Charles Koch the need for humility among his workforce. The thinking went that it was the high-flying ambition and loose planning that led to many of the business losses at Purina Mills. Charles Koch put a premium on culture among his employees. Among the most important attributes was valuing the team over the player, and the company over the individual. There was something unseemly about the grousing of commodities traders who clamored for ever-larger bonuses. If traders got giant bonuses, it might incentivize them to act like lone wolves, seeing a personal payday instead of the long-term well-being of the company. In the risky business of derivatives trading, Charles Koch knew that a lone trader could cause immeasurable damage."

"Every year, Charles Koch held an award ceremony in Wichita to recognize employees who had done an outstanding job. One year, he singled out Bernard Paulson. Standing before the gathering of his brain trust, Charles Koch recited a long list of Paulson’s accomplishments: the expansions, the market analysis, the new investments that steadily won Koch more market share. Paulson later said that it was embarrassing to be lauded before his peers, but there was clearly some part of him that enjoyed it. Charles Koch seemed to be praising Paulson to convey one lesson: Paulson had treated the Pine Bend refinery like it was his own company. Paulson didn’t act like an employee; he acted like a small-business owner. Paulson thought for himself, and he treated Koch Industries’ money as if it were his own. And Paulson shared in the glory once it was realized. “He pointed out, ‘This is entrepreneurial,’ ” Paulson recalled. “He said that’s what he wanted the entire company to do. To be entrepreneurs.”"

"employees felt like they owned a piece of Koch Industries. Charles Koch gave them performance-based bonuses and issued them “shadow stock” contracts that paid out as the company’s value increased, but that didn’t confer actual ownership. The real shares of Koch Industires were tighly held by Charles and David Koch,"

"In the earliest sessions, Charles Koch invited outside speakers to address the crowd. He ran workshops on the Dale Carnegie theory of management that built on Carnegie’s famous book How to Win Friends and Influence People. These classes focused on the art of management and productivity, and required managers to give short speeches to help them learn to communicate effectively."

"Charles Koch invited one of the brightest young business consultants in the nation to speak in Wichita, a Harvard professor named Michael Porter. Porter published a book in 1980 called Competitive Strategy that offered a new framework for how to run a business. The book provided a detailed plan for companies to analyze the market in which they operated. Porter visited Koch Industries multiple times, accompanied by a team of consultants. The team helped Koch’s managers look into their own business lines and apply Porter’s ideas, using good data to figure out the best path toward boosting profits and growing. Porter helped Koch executives learn how to analyze their competitive advantage, analyze their competitors, and come up with the best plan to capitalize on the company’s market position."

"businesses needed to fight back, and not on the terms that were laid out for them by their opponents. The business community needed to wage a long-term campaign that would change the way Americans thought about the markets and the role of government. Koch said that the campaign should have four elements: 1) Education 2) Media outreach 3) Litigation 4) Political influence For education, Charles Koch said that business leaders needed to populate public universities with academics who would advocate for free enterprise and do research to support it. When it came to the media, Koch said that businesses should “appropriately ‘reward’ the media when they promote the free market and withdraw support when they attack it.” In terms of litigation, Koch suggested that corporations should “announce publicly and vigorously, both as individual companies and through associations, that they will not cooperate with the government beyond the legally compelled minimum in developing or complying with control programs.” For political action, Koch recommended lobbying and “litigation to affect bureaucratic behavior.” But when it came to influencing Washington, he sounded a note of caution. He said that engaging with the government tends to corrupt businesspeople, tempting them to game the system through lobbying that delivers profit by hijacking public policy. He said this temptation ultimately undercuts businesses by making them look hypocritical—their support for free markets must be pure if it was to be followed. Therefore, lobbying should be a “limited program,” he said. Charles Koch would remain remarkably true to this basic game plan over the next forty years. The only part that would change significantly would be the “limited” nature of lobbying and campaign contributions. Koch would eventually build one of the largest lobbying and political influence machines in US history. But the rest of the plan was executed almost exactly as he laid it out in 1974."

"The development group that Brad Hall oversaw resembled these private equity firms in some ways. But there was a fundamental difference. Koch’s development group had patience. It thought on a timeline of ten or twenty years, not twelve to eighteen months. And, unlike virtually any other private equity firm, Koch’s group had only two shareholders to answer to: Charles and David Koch. For these reasons, Koch made acquisitions like nobody else. It tended to rush into markets when others were leaving. It tended to buy companies only when they were distressed and no one else wanted them. Koch was accustomed to the wild volatility of energy markets, so the company knew that most downturns were temporary."

"Charles Koch liked to say that growing was a lot like the process of scientific inquiry: You came up with a hypothesis, and then you tested the hypothesis against the hard rocks of reality. You did this again and again until you found out what was true."

"Every Koch business leader was expected to create their own Value Creation Strategy. They needed to look for new companies to buy, new plants to build, and expansion projects for existing plants. This wasn’t exactly new—growth was ingrained in Koch’s DNA from the beginning, when Sterling Varner encouraged his employees to keep their eyes peeled for investment opportunities. But the VCS regimen was different. Business leaders knew that Charles Koch would cut or increase their bonus pay based on the Value Creation Strategies they delivered. Expansion was once applauded; now it would be required."

"Faragher and her new colleagues were told that they were being let in on a secret. They were about to learn the Koch way of doing business. And Charles Koch, the CEO himself, would arrive to reveal the secrets in person. Even decades later, Faragher would vividly remember seeing Charles Koch walk out onto the stage to address the crowd. He had bone-deep confidence, the kind that expresses itself in the weird way of making a man simultaneously humble and also completely certain of his beliefs. During such meetings, Charles Koch explained that there were fundamental laws guiding the natural world: the law of inertia, the law of gravity. These were immutable forces that dictated events. And there were also immutable laws that governed human affairs. History showed, inarguably, that the laws protecting individual liberty and free-market capitalism were the only principles that could form the bedrock of a healthy society. The same held true for creating a healthy company. Individual liberty and free-market capitalism were the cornerstones. These principles would guide every action of every employee inside the company. Commitment to these laws was a precondition to employment at Koch Industries. It was also the surest path to a virtuous and prosperous life."

"Charles Koch and his lieutenants considered Koch to be an information-gathering machine that built up stores of knowledge that were deeper and sharper than its competitors’."

"The training began with a stringent hiring process that selected only a certain kind of employee. Koch Industries developed a four-part interview process that revolved around Charles Koch’s Ten Guiding Principles. Job candidates, many of them fresh out of college, were led through lengthy lists of questions that sought to determine if they would adhere to Koch’s principles. Only the select few were chosen. “You need diversity in certain ways,” explained Randy Pohlman, who directed Koch’s human resources division until the mid-1990s. “But if you’re Koch Industries, you don’t want people who don’t believe in free markets. They’re not going to be successful there. That’s not the kind of diversity you want. . . . If you’re going to start hiring every other person as a Socialist to have nice diversity—it’s not going to work,” Pohlman said. Once the free-market adherents were hired, Koch began training them immediately. The new hires were collected in groups and led down a long hallway in the basement of the Tower, to a large conference room where round tables were set up to accommodate them. Their training session began with a video address from Charles Koch, projected on a large screen. He laid out the central tenants of MBM, and emphasized the importance of learning the code. And after the video was finished, employees learned the specific codes and rules of this new way of thinking. They broke into small groups and ran through simulations where they put the principles into practice. The training sessions lasted roughly two days. Once employees were on the job, the culture and the vocabulary were reinforced daily in every meeting and conversation, to create a kind of deep muscle memory of the culture."

"Charles Koch took the stage, and his mood was somber. As he stood in front of the crowd, he described the severity of the economic downturn. He didn’t try to varnish the ugly truth or avoid stating directly what many of them knew was coming. Charles Koch walked through each division of the company and explained the damage that was being done. There was less demand for construction materials at Georgia-Pacific. There was less demand for carpeting and clothing at Invista. There was less demand for fertilizer, less demand for gasoline from the refineries. Not everyone at the company would come back from the holidays to a job. “He was standing up there in front of probably two thousand people, saying, ‘Look, we’re obviously going to get through this. But I’m going to be very honest with you folks. We’re going to have to make some very serious adjustments to get through it,” Jones recalled."

"Charles Koch made it abundantly clear to his team that they would work toward one goal: to maximize Koch’s long-term return on investment. The firm wasn’t looking for quick returns. Koch would press the advantage of Charles Koch’s patience, looking for deals that other investors might avoid because the payouts wouldn’t come for years. Charles Koch institutionalized the company’s “trading mentality” by embedding it in a new, secretive group that was formed on the third floor of the Tower, near Charles Koch’s office. This group rivaled any private equity firm in the nation. It was called the Corporate Development Board."

"Koch’s growth was not slow and steady—it was seismic, with periods of steady advancement that were punctuated by great lurches forward. Charles Koch had claimed to crack the code of creating prosperity, and the wealth machine he built now seemed unstoppable."

"When a group of bankers tried to convince Charles Koch to take Koch Industries public, he told them he was worried that doing so might let the world learn just how much money Koch’s commodities traders earned. Koch’s trading profits were so high that Charles Koch worried that counterparties might stop doing business with the company (presumably out of fear that Koch traders made so much money that it must come at the expense of anyone on the other side of a trade)."

"Charles Koch took the techniques learned in abstract markets and applied them to the real-world industries he knew so well. He talked repeatedly not about trading but about a trading mind-set. The world was filled with assets and filled with opportunities to buy and sell. Superior information would allow Koch to make superior acquisitions. The massive amounts of cash that Koch generated across its operations would be put to use buying and selling assets in the real world."